Crises pass, and markets eventually regain equilibrium.
We have seen some uneasy times lately. Uneasiness impacts the financial markets. When it does, we all need to keep some long-term perspective in mind. Those who race to the sidelines and exit equities may regret the choice when crises pass.
Wall Street loves calm. Traders literally want “business as usual,” every day. If breaking news disrupts that calm, it can rattle the market – but every investor must realize that these disruptive events are exceptions to the norm. (If the major Wall Street indices rollercoastered dramatically every day, who would invest in stocks to begin with?)
History shows how the market has bounced back in the past. You probably know the old financial industry saying: past performance is no guarantee of future results. That is certainly true, but it is also true that the major indices have staged some impressive recoveries when confronted with turbulence.
We do not need to look back very far to see some of this resilience. In May, the S&P 500 posted a single-day loss of 1.8%. Just three market days later, 85% of that loss had been recovered. Remember the stunning Brexit vote in the United Kingdom? The S&P fell 5.3% in the two trading days after that news broke. It took about a week to gain all of that back.1
When China startlingly devalued the yuan in August 2015, there was a true correction in the S&P; it lost 11%. In roughly two months, it was back at its former level.1
Looking back further, we can be encouraged by how stocks rebounded after the unthinkable shock of 9/11. Wall Street was closed for five calendar days after the attack; on September 17, 2001, the Dow slid 7.1% (684 points). It would eventually drop more than 14%. The S&P 500 retreated 11.6% during the week when the market reopened. Even so, one month later, the three major U.S. equity benchmarks had recouped their losses.2
Stock market corrections happen regularly. In fact, this current period is one of the calmest on record. As the summer of 2017 wraps up, the S&P 500 has gone more than a year without a 5% dip. The last stretch this long without a 5% pullback was in 1995, and this has happened only six times since 1950.3
Back on May 17, the Dow slipped 373 points. Yet with the index comfortably above 20,000, that single trading session saw only a 1.8% retreat. A 1,000-point, single-day fall for the Dow 30 is now a possibility. If the Dow drops 1,000 points in a day for the first time, investors will be shocked – but they should remember that the Dow also rises.4
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - businessinsider.com/stock-market-news-buy-the-dip-bulletproof-rebound-2017-8 [8/15/17]
2 - investopedia.com/financial-edge/0911/how-september-11-affected-the-u.s.-stock-market.aspx [9/11/17]
3 - investopedia.com/news/why-stock-market-correction-may-rattle-investors/ [7/18/17]
4 - latimes.com/business/hiltzik/la-fi-hiltzik-market-corrections-20170530-story.html [5/30/17]
Basic estate planning documents may not communicate your intentions.
There are three degrees of estate planning: advanced, basic, and none at all. Basic is better than none, but elementary estate planning can still leave something to be desired. While appropriate documents may be in place, they may not be able to fully convey what you really want to do with your estate.
Have you communicated your wishes to your heirs, in writing? Cut-and-dried, boilerplate legal forms will hardly do this for you.
In a wealth transfer strategy (as opposed to a basic, generic estate plan), you share your values and goals in addition to your assets. You hand down your wealth with purpose, noting to your beneficiaries and heirs what should be done with it. You also let them know how long the transfer of assets may take. This way, expectations are set, and you reduce the risk of your beneficiaries and heirs being unpleasantly surprised.
Are your heirs prepared to inherit your wealth? Prepare them as best you can during your lifetime. Introduce them to the financial, tax, and insurance professionals who have helped you through the years; they should know how to contact these professionals, and they should value their wisdom.
Explain the “why” of your estate planning decisions. For example, if you intend to transfer assets to heirs or charity through a living trust, a charitable remainder trust, or a qualified charitable distribution from an IRA, share the logic behind the move.
Also, let your heirs know that your wealth transfer strategy is dynamic. It can change. Five or ten years from now, you may have more or less wealth than you currently do, and life events may come along and prompt changes to your estate planning documents. Speaking of communication, this leads to a third, important aspect of a wealth transfer strategy.
Have you double-checked things? Look at your beneficiary forms and other estate planning documents. Are they up to date?
When a beneficiary form is out of date, it can invite problems – because legally, the instructions on a beneficiary form can overrule a will bequest. What if the named beneficiary is dead, and the contingent beneficiary is dead as well? What if your named beneficiary is estranged or divorced from you? In such instances, the asset may not transfer to whom you wish after you pass away. Looking at the wealth transfer process from another angle, you also want to make sure you have an executor who is of sound mind and who has the potential to remain lucid and reasonably healthy for years to come.1
A basic estate plan is better than procrastination. A bona fide wealth transfer strategy is even better. Involving your heirs in its creation, refinement, and implementation may help you guide your wealth into the future in accordance with your goals.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - thebalance.com/why-beneficiary-designations-override-your-will-2388824 [8/28/17]
How can you convey its importance and its meaning?
Are you an owner of a thriving business or a medical or legal practice? Are you a highly paid executive? If you have children, at some point they may discern how wealthy you are – and in turn, learn how “rich” they are. How will you handle that moment? How will they handle that knowledge?
Some kids end up valuing family wealth more than others. We all know (or have heard) about children from wealthy families who grew up to become opportunistic, materialistic, and unmotivated young adults living off their parents’ largess. Other children learn to treat family money with respect and admiration, recognizing the role it plays for the family, while glimpsing its potential to help charities and the community.
What accounts for the difference? It may boil down to values. When the right values are handed down, a young adult is poised to hold wealth in high regard and receive it with maturity.
Some parents never tell their children how wealthy they really are. This is not uncommon: in a recent U.S. Trust survey of households with investable assets greater than $3 million, 64% of those polled indicated that they had said nothing or nearly nothing about their net worth to their kids.1
This is also a risk. In hiding the details and avoiding the talk, parents may see a child grow into a young adult who is ill-prepared to understand and manage wealth.
One good step is to set some expectations. After your kids learn how wealthy you are, they may expect your money to play a financial part in their personal lives, especially in adolescence. Tell them, frankly, what you are willing or not willing to do and why. Where will the family wealth come into their lives? Will you want to fund their college educations, or help them with car payments? You may or may not want to do that.
You can help them see that wealth has meaning. Some financial professionals like to ask their clients the question, “what does having money mean to you?” In other words, what should that money accomplish? What dreams should it help you pursue, and what fears or worries could it be used to address? How does having money fit into your vision of success – is it integral to it or inessential to it?
It has been said that money never transforms character; it simply reveals it. The responsibility of handling wealth amounts to a test of character. Thoughtful conversations with your children about the meaning of wealth may help them pass that important test when the time comes.
1 - reuters.com/article/us-money-generations-strategies-idUSKBN0OX1RH20150617 [6/17/15]
You may assume you will. That assumption could be a retirement planning risk.
How long do you think you will work? Are you one of those baby boomers (or Gen Xers) who believes he or she can work past 65?
Some pre-retirees are basing their entire retirement transition on that belief, and that could be financially perilous.
In a new survey on retirement age, the gap between perception and reality stands out. The Employee Benefit Research Institute (EBRI) recently published its 2017 Retirement Confidence Survey, and the big takeaway from all the data is that most American workers (75%) believe they will be on the job at or after age 65. That belief conflicts with fact, for only 23% of retired workers EBRI polled this year said that they had stayed on the job until they were 65 or older.1
So, what are today’s pre-retirees to believe? Will they upend all their assumptions about retiring? Will working until 70 become the new normal? Or will their retirement transitions happen as many do today, arriving earlier and more abruptly than anticipated?
Perhaps this generation can work longer. AARP, for one, predicts that nearly a quarter of Americans 70-74 years old will be working in 2022, including nearly 40% of women that age by 2024. That would still leave many Americans retiring in their sixties – and more to the point, working until 70 is not a retirement plan.2
What if you retire at 63, two years before you can enroll in Medicare? EBRI’s statistics indicate that this predicament has been common. You can pay for up to 18 months of COBRA (which is not cheap), tap a Health Savings Account (if you have one), or take advantage of your spouse’s employer-sponsored health coverage (if your spouse still works and has some). Beyond those options, you could either pay (greatly) for private health insurance or go uninsured.3
What if you end up claiming Social Security earlier than planned? Given an average lifespan (i.e., you live into your eighties), that may not be so bad – you will get smaller monthly Social Security payments if you claim at 63 rather than at the Full Retirement Age (FRA) of 67, but the total amount of retirement benefits you receive over your lifetime should be about the same. Retiring and claiming Social Security well before Full Retirement Age (FRA), however, may mean a drastic revision of your retirement income strategy, if not your whole retirement plan.4
What will happen to your retirement assets if you leave work early? Will you still be able to contribute to your IRA(s) or pay the premiums on a cash value life insurance policy? Could you postpone withdrawals from your retirement accounts for months or years? How long can you count on this bull market?
If you are a baby boomer or Gen Xer, hopefully you have planned or built wealth to such a degree that the shock of an early retirement will not derail your retirement plan. It is realistic to recognize that it could.
If you want to work past 65, one key may be keeping your job skills current. The Transamerica Center for Retirement Studies reports that only about 40% of baby boomers are doing that.1
Lastly, if you switch jobs, you may improve your odds to work longer. A new study from the Center for Retirement Research at Boston College notes that 55% of college-educated workers who voluntarily changed jobs in their fifties were still working at age 65, compared with only 45% of workers who stayed at the same employer.1
1 - cnbc.com/2017/04/21/the-dangers-of-planning-on-working-longer.html [4/21/17]
2 - aarp.org/politics-society/history/info-2016/baby-boomers-turning-70.html [1/16]
3 - forbes.com/sites/financialfinesse/2017/02/09/how-to-cover-medical-expenses-if-you-retire-before-65/ [2/9/17]
4 - fool.com/retirement/2017/03/04/the-one-social-security-mistake-you-dont-want-to-m.aspx [3/4/17]
You could save today & tomorrow, often without that penny-pinching feeling.
Directly & indirectly, you might be able to save more per month than you think. Hidden paths to greater savings can be found at home and at work, and their potential might surprise you.
Little everyday things may be costing you dollars you could keep. Simply paying cash instead of using a credit card could save you four figures annually. An average U.S. household carries $9,000 in revolving debt; as credit cards currently have a 13% average annual interest rate, that average household pays more than $1,000 in finance charges a year.1
The typical bank customer makes four $60 withdrawals from ATMs a month – given that two or three are probably away from the host bank, that means $5-12 a month lost to ATM fees, or about $60-100 a year. A common household gets about 15 hard-copy bills a month and spends roughly $80 a year on stamps to mail them – why not pay bills online? Automating payments also rescues you from late fees.1
A household that runs full loads in washing machines and dishwashers, washes cars primarily with water from a bucket, and turns off the tap while shaving or brushing teeth may save $100 (or more) in annual water costs.1
Then, there are the big things you could do. If you are saving and investing for the future in a regular, taxable brokerage account, that account has a drawback: you must pay taxes on your investment income in the year it is received. So, you are really losing X% of your return to the tax man (the percentage will reflect your income tax rate).2
In traditional IRAs and many workplace retirement plans, you save for retirement using pre-tax dollars. None of the dollars you invest in those plans count in your taxable income, and the invested assets can grow and compound in the account without being taxed. This year and in years to follow, this means significant tax savings for you. The earnings of these accounts are only taxed when withdrawn.2,3
How would you like to save hundreds of dollars per month in retirement? By saving and investing for retirement using a Roth IRA, that is essentially the potential you give yourself. Roth IRAs are the inverse of traditional IRAs: the dollars you direct into them are not tax deductible, but the withdrawals are tax free in retirement (assuming you abide by I.R.S. rules). Imagine being able to receive retirement income for 20 or 30 years without paying a penny of federal income taxes on it in the years you receive it. Now imagine how sizable that income stream might be after decades of compounding and equity investment for that IRA.4
Many of us can find more money to save, today & tomorrow. Sometimes the saving possibilities are right in front of us. Other times, they may come to us in the future because of present-day financial decisions. We can potentially realize some savings by changes in our financial behavior or our choice of investing vehicles, without resorting to austerity.
1 - realsimple.com/work-life/money/saving/money-saving-secrets [7/13/17]
2 - investopedia.com/articles/stocks/11/intro-tax-efficient-investing.asp [8/5/16]
3 - blog.turbotax.intuit.com/tax-deductions-and-credits-2/can-you-deduct-401k-savings-from-your-taxes-7169/ [2/7/17]
4 - cnbc.com/2017/05/15/personal-finance-expert-do-these-6-things-to-save-an-extra-700-per-month.html [5/15/17]
Careers & businesses end, but the need to borrow remains.
We spend much of our adult lives working, borrowing, and buying. A good credit score is our ally along the way. It retains its importance when we retire.
Retirees should do everything they can to maintain their credit rating. A FICO score of 700 or higher is useful whether an individual works or not.
For example, some retirees will decide to refinance their home loans. A recently published study from the Center for Retirement Research at Boston College noted that in 2013, 50% of homeowners older than 55 carried some form of housing debt. In 2017, it is probable that picture is unchanged. Arranging a lower interest rate on any remaining mortgage payments could bring income-challenged retirees more money each month. A strong FICO score will help them do that; a substandard one will not.1
Most retirees will want to buy a car at some point. Perhaps buying a recreational vehicle is on their to-do list. Very few car, truck, or RV purchases are all cash. A good credit score can help a retiree line up an auto loan with lower interest payments.
Insurance companies also study retiree credit habits. Since the early 1990s, credit-based insurance scores have been fundamental to underwriting. Used in all but a few states, they play a major role in determining car insurance and homeowner insurance premiums.2
The Fair Isaac Co. (FICO) generates credit-based insurance scores, which are variants of standard credit scores. Job and income data do not matter in a credit-based insurance score. Instead, insurers add up factors from a person’s credit history to project the likelihood of that person having an insurance loss. When a retiree consistently makes bill and loan payments on time, that helps her or his credit-based insurance score. The score is hurt when bill or loan payments are missed or delinquent or when debt levels become excessive.2,3
A strong credit rating can come in handy in other financial situations. It can help a retiree qualify for another credit card, should the need arise. If a senior wants to buy a smaller home (or move into an assisted living facility), a credit score may be a make-or-break factor. If a senior co-signs a loan for children or grandchildren, a credit rating will matter.
How can retirees boost their credit scores? Some obvious methods come to mind as well as less obvious ones. Besides paying bills on time and keeping credit card balances low, wiping out small debts can help lower a retiree’s credit utilization ratio. Asking a card issuer to raise a debt limit on a card can have the same effect, provided the monthly balance stays low and is paid off routinely.4
Too few retirees review their credit reports, and about 20% of individual credit reports have errors. More retirees ought to ask the three big credit bureaus – Equifax, TransUnion, and Experian – for a free copy of their credit report. Every 12 months, they are entitled to one.4
Credit cards held for decades should be kept active, especially if they have good payment histories. The same goes for high-limit cards. Closing these accounts out can do more harm than good to a credit rating.
Remember that good credit counts at any age. TransUnion recently surveyed baby boomers and discovered that nearly half thought their credit scores would become less important after they turned 70. As you can see by the above examples, that is not true. A high credit score can help you buy and borrow long after your working days are done.5
1 - nytimes.com/2016/11/22/health/new-old-age-mortgage-debt.html [11/22/16]
2 - naic.org/cipr_topics/topic_credit_based_insurance_score.htm [12/30/16]
3 - kiplinger.com/article/credit/T017-C000-S015-why-your-credit-score-matters-in-retirement.html [2/9/17]
4 - fool.com/retirement/general/2016/05/13/5-ways-to-boost-your-credit-score-in-retirement.aspx [5/13/16]
5 - kiplinger.com/article/credit/T017-C000-S002-4-reasons-for-retirees-to-maintain-strong-credit.html [7/16]